Question
James acquired 40% of the outstanding voting shares of Schott Co. on January 1, 2015 for $210,000 in cash when Schotts owners equity was $400,000.
James acquired 40% of the outstanding voting shares of Schott Co. on January 1, 2015 for $210,000 in cash when Schotts owners equity was $400,000. One of the companys buildings, that had a 20-year remaining life, was worth $100,000, even though its net book value was $60,000. Schott also had an unrecorded patent having a value of $85,000 that had a 10-year life. In 2015, Schott recorded net income of $60,000 and distributed a total cash dividend of $12,000. Its fortunes changed in 2016 when it recorded a $40,000 net loss, but the Board still paid $10,000 in dividends. This was a strategic investment and James began purchasing inventory from Schott right away. In 2015, Schott sold inventory with an original cost of $60,000 to James for $90,000. James had $15,000 of these goods in inventory (at the selling price) at December 31, 2015, but it was all sold in 2016. In 2016, Schott sold another $80,000 of inventory to James and had a gross profit on the sale of 37.5%. All but 30% of this was sold to third parties during the year.
Required: 1. Record the entries James needs in 2015 and 2016 in conjunction with this investment. 2. What is the balance in the investment account at December 31, 2016?
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